MARC Ratings has affirmed its rating of AA-IS on FGV Holdings Berhad’s (FGV) Sukuk Murabahah Programme of up to RM3.0 billion with a stable outlook.
FGV’s sizeable and integrated palm oil operations, improving production metrics on accelerated replanting efforts at its estates, and healthy balance sheet are key drivers of the rating affirmation. Moderating rating factors are the susceptibility of its performance to crude palm oil (CPO) price volatility and the potential increase in borrowings. The rating incorporates a one-notch uplift based on MARC Ratings’ assessment of parent Federal Land Development Authority’s (FELDA) intrinsic support to FGV given the significant operational and financial linkages between the two entities.
FGV is one of the largest CPO producers in Malaysia, accounting for about 14% of total CPO production domestically and 3% globally in 2023. During 9M2024, CPO production grew by 17.7% y-o-y to 2.2 million MT on significant improvement in upstream production operations; FGV recorded a higher y-o-y oil extraction rate (OER) of 20.60% (9M2023: 20.52%), on stronger productivity. The rating agency notes FGV’s OER has generally been above the Malaysian industry average of 20.07%. FGV’s accelerated replanting programme in recent years has contributed to a substantial improvement in its tree maturity profile to an average of 12.6 years as at end-September 2024 compared to 14.3 years in 2021. Over the next two years, the group has budgeted RM376.0 million p.a. to replant about 15,000 ha or 4.6% of its total planted area annually to support higher fresh fruit bunch (FFB) yields over the longer term.
FGV processed 12.7 million MT of FFB in 2023, of which a sizeable portion — 42% from FELDA settlers; 28% from third-party estates — is from external sources. As such, FGV’s financial performance is more sensitive to CPO price movement as the bulk of its CPO sales are carried out on a spot basis whereas its peers, which secure CPO output from their own plantations, typically transact on a forward contract basis.
The rating agency notes FGV’s upstream production volume is used internally for downstream activities including for palm-based food products, oleochemicals, and biodiesel. This is reflected by the revenue contribution from downstream operations of RM12.2 billion against RM1.0 billion from upstream operations. Downstream margin, however, remains thin at 2.0%, reflecting the stiff competition in this segment. In addition, FGV’s financial performance is characterised by the provision of 15% of operating profit to FELDA for the leased land as well as an annual lease payment of RM243 million. This relates to 80% of its total landbank of 416,289 ha that is leased from FELDA under a long-term lease agreement.
Group revenue rose by 16.0% y-o-y to RM16.2 billion, in line with higher realised CPO price and higher FFB production. Pre-tax profit improved sharply to RM347.0 million (9M2023: RM157.0 million) due to a 10.9% y-o-y reduction in production cost to RM2,552/MT, supported by lower fertiliser cost. Cash flow from operations, which stood at RM876.4 million as at 9M2024, is expected to improve for full year 2024 as palm production peaked during the third quarter. The rating agency understands that the increase in monthly minimum wage to RM1,700 from the current RM1,500 is expected to have minimal impact on profitability.
Group borrowings rose slightly to RM3.6 billion as at end-September 2024 (2023: RM3.4 billion), of which about 55% is short-term financing, mainly incurred for fertiliser purchases; gross debt-to-equity stood modest at 0.48x (2023: 0.45x). Capex requirement of RM2.8 billion over the next two years, to further strengthen its upstream and downstream operations, will be funded through a mixture of borrowings and internal funds. Cash and bank balances of RM1.2 billion provide relatively strong liquidity. Going forward, the rating agency does not expect any major change in FGV’s profile and strategy. FGV will remain as the commercial arm of FELDA, which currently holds 81.9% interest, notwithstanding the ongoing initiatives to reduce the parent’s stake in the company.